Rule 506(b) vs. Rule 506(c): Which Reg D Route Fits?

Rule 506 of Regulation D offers two paths for selling securities in a private placement, and the choice between them turns mainly on advertising and on who the investors are. Under Rule 506(b), an issuer may not use general solicitation but may sell to a limited number of non-accredited investors. Under Rule 506(c), an issuer may advertise broadly but may sell only to accredited investors and must take reasonable steps to verify that status. Both have no dollar cap, both require a Form D notice and both are subject to bad actor disqualification. This guide sets out how Rule 506(b) vs Rule 506(c) compares and what each demands.

It is a general explanation, not legal advice. Issuers should work with securities counsel and read the current rule text.

In brief

• 506(b): no general solicitation; unlimited accredited investors; up to 35 non-accredited purchasers in any 90-calendar-day period; information requirements if non-accredited investors participate.
• 506(c): general solicitation allowed; all purchasers must be accredited; the issuer must take reasonable steps to verify.
• Both: no limit on the amount raised, Form D within 15 days after the first sale, bad actor rules, restricted securities.

What Rule 506 is

Rule 506, titled “Exemption for limited offers and sales without regard to dollar amount of offering,” says that offers and sales satisfying paragraph (b) or (c) are deemed to be transactions not involving a public offering within Section 4(a)(2) of the Securities Act. Paragraph (b) governs offerings subject to a limit on the manner of offering, and paragraph (c) governs offerings not subject to that limit. An issuer picks one for a given offering and structures its marketing and investor intake to match.

Rule 506 sits within Regulation D, along with the definitions in Rule 501, the general conditions in Rule 502, the notice of sales in Rule 503 and the separate Rule 504 exemption. For how Regulation D compares with Regulation A, see our guide on Reg A versus Reg D.

Rule 506(b) in detail

According to Rule 506(b) and the SEC’s overview page, an offering must meet the general conditions in Rules 501 and 502 and these specific ones:

1. No general solicitation or general advertising. Rule 502(c) bars offers or sales by any form of general solicitation, including advertisements, articles or notices published in newspapers, magazines or similar media or broadcast on television or radio, and seminars or meetings whose attendees were invited by general solicitation. Publishing a notice under Rule 135c or filing Form D with a good-faith attempt to comply does not count as general solicitation.
2. Limit on non-accredited purchasers. There must be no more than, or the issuer must reasonably believe there are no more than, 35 purchasers in offerings under the section in any 90-calendar-day period. Rule 501(e) explains how to count, and it excludes certain related persons and accredited investors from the count.
3. Sophistication. Each purchaser who is not an accredited investor, alone or with purchaser representatives, must have such knowledge and experience in financial and business matters that they can evaluate the merits and risks of the investment, or the issuer must reasonably believe so immediately before the sale.
4. Information. If the issuer sells to any non-accredited purchaser, Rule 502(b) requires it to furnish specified information a reasonable time before the sale. For issuers not subject to Exchange Act reporting, that is generally the kind of information in Part II of Form 1-A if the issuer is eligible for Regulation A, or the kind in Part I of a registration statement on the form the issuer could use, plus financial statements, with the details depending on the offering size. Rule 502(b) does not require this information to be furnished to accredited investors, though the rule’s note advises considering it in light of the antifraud provisions.

What an issuer can do under 506(b)

• Sell to an unlimited number of accredited investors.
• Raise an unlimited amount, as the SEC’s page notes.
• Rely on pre-existing, substantive relationships with investors rather than public marketing.

Rule 506(c) in detail

Rule 506(c) permits issuers to solicit broadly and advertise, provided:

1. All purchasers are accredited investors. Rule 506(c)(2)(i).
2. The issuer takes reasonable steps to verify accredited status. Rule 506(c)(2)(ii) requires this and lists non-exclusive, non-mandatory methods for natural persons that deem the issuer to have taken reasonable steps, provided it does not have knowledge that the person is not accredited. These include:
   • For income-based status, reviewing IRS forms that report income for the two most recent years (such as Form W-2, Form 1099, Schedule K-1 or Form 1040) and obtaining a written representation of a reasonable expectation of reaching the required income level in the current year.
   • For net-worth-based status, reviewing documents dated within the prior three months, such as bank and brokerage statements for assets and a consumer report from at least one nationwide consumer reporting agency for liabilities, and obtaining a written representation that all liabilities necessary for the determination have been disclosed.
   • Obtaining written confirmation within the prior three months from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney in good standing or a registered CPA in good standing that it has taken reasonable steps to verify and has determined the purchaser is accredited.
   • Special methods for certain existing investors and for investors the issuer verified earlier.
3. The other conditions of Regulation D in Rules 501 and 502(a) and (d).

The methods are safe-harbor style examples. Whether steps are reasonable depends on the facts, such as the nature of the purchaser, the information the issuer has about the purchaser and the terms of the offering, so counsel typically designs the process for each deal.

Accredited investor under Rule 501(a)

Both rules depend on this definition. For natural persons, the rule includes:

• A person whose individual net worth, or joint net worth with a spouse or spousal equivalent, exceeds $1 million, not counting the primary residence as an asset and subject to the rule’s treatment of debt secured by the residence.
• A person who had individual income above $200,000 in each of the two most recent years, or joint income with a spouse or spousal equivalent above $300,000, with a reasonable expectation of the same level in the current year.
• A person holding certain professional certifications, designations or credentials that the SEC has designated.
• Directors, executive officers and general partners of the issuer.

The definition also lists banks, registered broker-dealers, investment advisers, insurance companies, certain plans, and entities that meet asset tests, among others. Check the current text of Rule 501(a) because the definition has been amended over time.

Form D, state filings and bad actors

• Form D. Rule 503 requires a notice of sales on Form D no later than 15 calendar days after the first sale in each new offering. The SEC’s page says the date of first sale is the date the first investor is irrevocably contractually committed to invest, that no filing fee is charged and that filing is electronic through EDGAR.
• State law. The SEC’s 506(c) page notes federal preemption from state registration and qualification but states retain authority to require notice filings and collect fees.
• Bad actor disqualification. Rule 506(d) disqualifies issuers whose covered persons have certain disqualifying events, and the rule applies to both 506(b) and 506(c) offerings; the SEC’s 506(c) page confirms bad actor provisions apply there. Counsel typically runs questionnaires on directors, officers, large holders and promoters.
• Restricted securities. Purchasers in a 506(c) offering receive restricted securities, per the SEC. Rule 502(d) also requires issuers in Regulation D offerings to exercise reasonable care that purchasers are not underwriters. Resale generally requires registration or an exemption.

Side-by-side comparison

How issuers choose

Issuers typically consider:

• Marketing plan. If they intend to use websites, social media, email campaigns, webinars or media interviews that describe the offering, 506(b) is likely closed to them, and 506(c) may fit.
• Investor profile. If non-accredited friends and family or employees would take part, 506(b) is the only Rule 506 path.
• Verification burden. 506(c) adds cost and friction, and some investors dislike providing tax or bank documents.
• Existing relationships. Where the issuer already has substantive relationships with accredited investors, 506(b) avoids verification.
• Switching. An issuer that has engaged in general solicitation in a 506(b) offering cannot treat the offering as 506(b). Rule 152 on integration and the SEC’s guidance cover when an issuer may move from one offering to another.

A worked example, with made-up facts

A fictional fund sponsor plans a $20 million private offering. In Plan A, the sponsor calls 40 existing contacts with whom it has long-standing relationships, and 32 of them are accredited investors and 3 are non-accredited investors who meet the sophistication test. It furnishes Rule 502(b) information to the three. This fits 506(b). It files a Form D within 15 days after the first investor commits.

In Plan B, the sponsor posts a description of the offering on its website and buys online ads. Now it is engaged in general solicitation and needs 506(c). Every purchaser must be accredited and verified. The sponsor collects tax returns or third-party confirmation letters. It cannot accept the three non-accredited contacts.

Common misconceptions

• “A website with no terms is not solicitation.” Whether a communication is a general solicitation depends on its content and audience; counsel typically evaluates it.
• “506(c) verification follows a single mandatory checklist.” The rule requires reasonable steps, and the listed methods are non-exclusive and non-mandatory, so the right process depends on the facts.
• “506(b) has no investor suitability test.” Non-accredited purchasers must be sophisticated, and the issuer needs a reasonable belief about it.
• “Form D secures the exemption.” The exemption depends on meeting the conditions; Form D is a notice.
• “Accredited investors can’t lose money.” Accredited status is not a measure of safety. Antifraud provisions apply to both exemptions.

FAQ

Can a company run 506(b) and 506(c) offerings at the same time?

Possibly, but only if the offerings are not integrated and the marketing for one does not taint the other. The SEC’s integration framework in Rule 152 applies, and counsel typically reviews it first.

Does Rule 506(c) require a minimum investment?

Not by the rule’s text. Issuers may set their own minimums, but Rule 506(c) does not itself require one.

How long is verification valid?

The rule’s methods refer to documents dated within the prior three months for net worth verification and written confirmations within the prior three months. For investors verified earlier, Rule 506(c)(2)(ii)(E) lets an issuer obtain a written representation at the time of sale if it is not aware of contrary information.

Do 506(b) investors need to be told about risks?

Non-accredited purchasers must receive the information in Rule 502(b). All investors are protected by antifraud rules, and most issuers provide a private placement memorandum that describes risks.

What is the penalty for not filing a Form D?

Rule 503 sets the filing requirement, and the SEC’s guidance covers the notice. Consult counsel on the consequences of a late or missing notice.

Is there a cap on how much I can raise under Rule 506?

No. Rule 506 applies without regard to the dollar amount of the offering.